Homework and hard work seal the deal

When asked what he considered was the anniversary date of last year's Coles Group Ltd takeover, Wesfarmers Ltd managing director Richard Goyder nominates July 21 as the most appropriate.

That was the day, just before the end of last financial year, when the Coles board accepted the Wesfarmers deal, then valued at about $22 billion.

Mr Goyder admits that Wesfarmers in-house business development team had done its homework on Coles previously and was, therefore, prepared when the poorly performing retailer effectively raised the white flag with a review of its business.

Wesfarmers' original deal had been $16.47 a share, as either cash or a cash/scrip mix. Wesfarmers was leading a consortium including European buy-out fund Permira, private equity firm Pacific Equity Partners, and Macquarie Bank Ltd.

Rivals included US private equity giant Kohlberg Kravis Roberts and a private equity consortium including Carlyle Group, TPG (formerly Texas Pacific Group) and Blackstone Group. UK retail giant Tesco had earlier withdrawn as a potential contestant.

But by May, market jitters were putting pressure on the private equity players, who all withdrew by late June.

By July, things had altered drastically.

"This was the time 12 months ago when the first ripples of what became the credit crunch or lending situation arose," Mr Goyder said.

Wesfarmers' partners also pulled the pin on the deal, prompting the Perth-based conglomerate to go on alone.

Mr Goyder said Wesfarmers had already modelled the takeover as if it was going it alone, and having the decks cleared of partners under the circumstances was not a bad thing, especially as they had yet to negotiate the final arrangements of the deal regarding how the parties would exit.

"I was a little bit concerned about what we would do in five years' time," he said.

Ultimately, Wesfarmers changed the deal to equate to $17.25 per share (based on $4 cash and 0.2843 Wesfarmers shares), as well as leaving Coles shareholders a 25-cent dividend. This was what the Coles board accepted in early July.

But further market volatility and investor concerns led to further work on the deal.

Firstly, emerging a few days later with largest single corporate financing deal in the Australian loan market, after ANZ, NAB Capital and BNP Paribas approved a $10 billion loan facility.

The deal maker, ultimately, though, was the decision to offer as a component of the scrip deal a special class of securities - Wesfarmers Price Protected Shares - which put a guaranteed floor price for those that accepted them.

"There was the opportunity for hedge funds and a whole bunch of others to do what they do," Mr Goyder said.

"It needed a circuit breaker."

Offering WPPS provided certainty, allowing Wesfarmers management to get on with working out the merger rather than selling the deal.

Mr Goyder's takeover advice is simple - doing the homework, having a good board and having quality people on the deal.

"Bringing the whole thing off is one thing," he said.

"That is 10 per cent; 90 per cent is delivering the value out of the deal."